Funds' 10-year returns - long a selling point - are about to look much worse

As the financial crisis hammers fund returns, many managers are touting their stable long-term records to convince investors their money is safe. But that argument may soon vanish.

The 10-year returns of many funds have held up in part because of huge stock market gains in the fourth quarter of 1998. As this year ends, those returns will reflect a new decade of 1999 to 2009, a period that could look miserable for some big funds.

"If you think things look bad now, wait till the end of the year. . . . Ten-year returns will look horrible," said Daniel Wiener, chief executive of Adviser Investments Inc. of Newton.

Stocks soared in the last quarter of 1998 in the run-up to the technology bubble, lifting the Standard & Poor's 500 Index 21 percent in the quarter.

Many advisers and institutions base investment decisions on long-term returns, and their declines could spur calls from angry investors for managers to be fired. Firms may find it difficult to justify retaining poorly performing managers as they ax hundreds of other employees.

"We are going to see some star managers lose their stardom permanently and maybe leave the industry altogether," said Karen Dolan, director of fund analysis at Morningstar Inc.

Bill Miller of Legg Mason Inc is one well-known fund manager whose future is the subject of much speculation. He was the only manager to have beaten the Standard & Poor's 500 index for 15 straight years to 2006, but Miller's performance in his main Value Trust Fund has slipped dramatically since then.

The fund is down 54.5 percent this year, according to Lipper Inc.

That compares with the S&P index's negative 20.9 percent and 36.9 percent returns for the quarter-to-date and year-to-date, respectively.

Fidelity Investments' Harry Lange and Tim Cohen, managers of the Boston firm's flagship Magellan fund and the Growth & Income Portfolio, respectively, are also under scrutiny.

Lange's ill-timed bets on the financial sector this year pushed Magellan returns down 26.6 percent this quarter and 49.1 percent so far in 2008. The fund's size has been more than halved in 2008, to $21.5 billion, and it ranks as the third-worst in its category, according to Lipper.

Magellan returned 33.6 percent in 1998; excluding that year would mean its current 10-year return of negative 2.1 percent will fall more.

Cohen's $7.6 billion Growth & Income Portfolio, which has lost 49.1 percent this year, is ranked the second-worst in its category by Lipper.

Dolan said star fund managers may be able to survive the financial crisis if they make a strong recovery, but sustained weak performance could mean it's curtains for them. "That could in fact be a career killer," she added.

Muralikumar Anantharaman writes for Reuters.